U.S. patent application number 12/062140 was filed with the patent office on 2009-10-08 for settlement of futures contracts in foreign currencies.
Invention is credited to Peter Joseph Kovac, Peter Stuart SEIDEL.
Application Number | 20090254471 12/062140 |
Document ID | / |
Family ID | 41134144 |
Filed Date | 2009-10-08 |
United States Patent
Application |
20090254471 |
Kind Code |
A1 |
SEIDEL; Peter Stuart ; et
al. |
October 8, 2009 |
SETTLEMENT OF FUTURES CONTRACTS IN FOREIGN CURRENCIES
Abstract
A method and system are provided for executing a transaction
relating to a first futures contract. The first futures contract
involves a tradable asset, such as crude oil or another commodity,
and a first contract price and a first settlement price expressed
in a first currency, such as U.S. dollars. The first settlement
price is updated on a periodic basis, typically daily. The method
involves providing a second futures contract having an underlying
instrument that includes the first futures contract. The second
futures contract includes a second latest possible delivery date
and a second contract price and a second settlement price that are
denominated in a second currency. The second settlement price is
updated periodically. A periodic mark-to-market operation credits
or debits a buyer of the second futures contract based on the
periodic update to the second settlement price. Delivery of the
second contract occurs when the buyer pays the current second
settlement price in the second currency and receives the first
futures contract. Then, delivery of the first futures contract is
completed by delivering either the tradable entity or a financial
equivalent of the tradable entity based on the current first
settlement price.
Inventors: |
SEIDEL; Peter Stuart;
(Beverly Hills, CA) ; Kovac; Peter Joseph; (Santa
Monica, CA) |
Correspondence
Address: |
KATTEN MUCHIN ROSENMAN LLP;(C/O PATENT ADMINISTRATOR)
2900 K STREET NW, SUITE 200
WASHINGTON
DC
20007-5118
US
|
Family ID: |
41134144 |
Appl. No.: |
12/062140 |
Filed: |
April 3, 2008 |
Current U.S.
Class: |
705/37 |
Current CPC
Class: |
G06Q 40/04 20130101;
G06Q 40/06 20130101 |
Class at
Publication: |
705/37 |
International
Class: |
G06Q 40/00 20060101
G06Q040/00 |
Claims
1. A method for executing a transaction relating to a first futures
contract, the first futures contract including a first latest
possible delivery date and a first predetermined amount of a
tradable asset, a first contract price, and a first settlement
price, each of the first contract price and the first settlement
price being expressed as a respective amount of a first currency,
the first settlement price being updated on a periodic basis, and
the method comprising the steps of: providing a second futures
contract to a buyer, the second futures contract having an
underlying instrument that comprises the first futures contract,
wherein the second futures contract includes a second latest
possible delivery date, a second contract price, and a second
settlement price, each of the second contract price and the second
settlement price being expressed as a respective amount of a second
currency, the second settlement price being updated on a periodic
basis, and the second latest possible delivery date occurring on or
before the first latest possible delivery date; when the second
settlement price is updated, performing a periodic mark-to-market
operation by either crediting or debiting a buyer account based on
the corresponding updated second settlement price; delivering the
second futures contract on or before the second latest possible
delivery date by providing the first futures contract to the buyer
in exchange for a payment from the buyer of a current second
settlement price; and delivering the first futures contract on or
before the first latest possible delivery date by delivering one or
the other of the first predetermined amount of the tradable asset
to the buyer and a current first settlement price.
2. The method of claim 1, wherein the tradable asset comprises a
commodity.
3. The method of claim 2, wherein the commodity comprises crude
oil.
4. The method of claim 3, wherein the first futures contract
comprises a standard WTI contract.
5. The method of claim 3, wherein the first futures contract
comprises a standard Brent contract.
6. The method of claim 1, wherein the second latest possible
delivery date occurs one day prior to the first latest possible
delivery date.
7. The method of claim 1, wherein the tradable asset comprises at
least one asset selected from the group consisting of a stock, a
stock index, and a financial index.
8. The method of claim 1, wherein each of the first currency and
the second currency is selected from the group consisting of U.S.
dollars, European euros, Canadian dollars, U.K. pounds sterling,
Australian dollars, New Zealand dollars, Swiss francs, Norwegian
kroner, Swedish kronor, and Japanese yen.
9. A method of facilitating a trade involving a first futures
contract, the first futures contract including a first latest
possible delivery date and a first predetermined amount of a
tradable asset, a first contract price, and a first settlement
price, each of the first contract price and the first settlement
price being expressed as a respective amount of a first currency,
the first settlement price being updated on a periodic basis, and
the method comprising the steps of: providing a second futures
contract to a buyer, the second futures contract having an
underlying instrument that comprises the first futures contract,
wherein the second futures contract includes a second latest
possible delivery date, a second contract price, and a second
settlement price, each of the second contract price and the second
settlement price being expressed as a respective amount of a second
currency, the second settlement price being updated on a periodic
basis, and the second latest possible delivery date occurring on or
before the first latest possible delivery date; when the second
settlement price is updated, performing a periodic mark-to-market
operation by either crediting or debiting a buyer account based on
the corresponding updated second settlement price; delivering the
second futures contract on or before the second latest possible
delivery date by providing the first futures contract to the buyer
in exchange for a payment from the buyer of a current second
settlement price; and delivering the first futures contract on or
before the first latest possible delivery date by delivering one or
the other of the first predetermined amount of the tradable asset
to the buyer and a current first settlement price.
10. The method of claim 9, wherein the tradable asset comprises a
commodity.
11. The method of claim 10, wherein the commodity comprises crude
oil.
12. The method of claim 11, wherein the first futures contract
comprises a standard WTI contract.
13. The method of claim 11, wherein the first futures contract
comprises a standard Brent contract.
14. The method of claim 9, wherein the second latest possible
delivery date occurs one day prior to the first latest possible
delivery date.
15. The method of claim 9, wherein the tradable asset comprises at
least one asset selected from the group consisting of a stock, a
stock index, and a financial index.
16. The method of claim 9, wherein each of the first currency and
the second currency is selected from the group consisting of U.S.
dollars, European euros, Canadian dollars, U.K. pounds sterling,
Australian dollars, New Zealand dollars, Swiss francs, Norwegian
kroner, Swedish kronor, and Japanese yen.
17. A system for executing a transaction relating to a first
futures contract, the first futures contract including a first
latest possible delivery date and a first predetermined amount of a
tradable asset, a first contract price, and a first settlement
price, each of the first contract price and the first settlement
price being expressed as a respective amount of a first currency,
the first settlement price being updated on a periodic basis, and
the system comprising: a server at which the first futures contract
is actively traded; and an interface in communication with the
server, the interface being configured to enable a buyer to enter
into the first futures contract, wherein the server is configured
to: provide a second futures contract to a buyer, the second
futures contract having an underlying instrument that comprises the
first futures contract, wherein the second futures contract
includes a second latest possible delivery date, a second contract
price, and a second settlement price, each of the second contract
price and the second settlement price being expressed as a
respective amount of a second currency, the second settlement price
being updated on a periodic basis, and the second latest possible
delivery date occurring on or before the first latest possible
delivery date; when the second settlement price is updated, perform
a periodic mark-to-market operation by either crediting or debiting
a buyer account based on the corresponding updated second
settlement price; deliver the second futures contract on or before
the second latest possible delivery date by providing the first
futures contract to the buyer in exchange for a payment from the
buyer of a current second settlement price; and deliver the first
futures contract on or before the first latest possible delivery
date by delivering one or the other of the first predetermined
amount of the tradable asset to the buyer and a current first
settlement price.
18. The system of claim 17, wherein the tradable asset comprises a
commodity.
19. The system of claim 18, wherein the commodity comprises crude
oil.
20. The system of claim 19, wherein the first futures contract
comprises a standard WTI contract.
21. The system of claim 19, wherein the first futures contract
comprises a standard Brent contract.
22. The system of claim 17, wherein the second latest possible
delivery date occurs one day prior to the first latest possible
delivery date.
23. The system of claim 17, wherein the tradable asset comprises at
least one asset selected from the group consisting of a stock, a
stock index, and a financial index.
24. The system of claim 17, wherein each of the first currency and
the second currency is selected from the group consisting of U.S.
dollars, European euros, Canadian dollars, U.K. pounds sterling,
Australian dollars, New Zealand dollars, Swiss francs, Norwegian
kroner, Swedish kronor, and Japanese yen.
Description
BACKGROUND OF THE INVENTION
[0001] 1. Field of the Invention
[0002] The present invention relates to financial markets and
futures contracts for tradable assets, such as commodities or other
financial instruments. More particularly, the invention relates to
a system and method for facilitating pricing and trading of futures
contracts in a different currency than the one in which those same
contracts are ordinarily traded, thereby enabling a potential buyer
to use a preferred foreign currency.
[0003] 2. Related Art
[0004] In the financial world, a common type of derivatives
contract is a futures contract. A futures contract is a
standardized contract for delivery of a commodity, stock, financial
instrument, or cash-equivalent thereof or of a given index at a
time in the future. The purpose of a futures contract is to provide
a consistent and exchange-tradable vehicle for investors and
hedgers to easily manage risk. Some of the common features of
futures contracts include: Standardized contract specifications, a
last trading date, using a clearing house to clear the contracts,
relatively low margin requirements due to the financial stability
of the clearinghouse, and the cost of carry reflected in the price
of the contract.
[0005] A typical futures contract will trade at a premium or
discount to the actual level of the underlying instrument. This
premium or discount is known as the basis, and is the result of the
cost of carry. The cost of carry for a futures contract is what it
would cost to hold or store the underlying over the length of the
contract. Typically, the longer to the delivery date of the futures
contract, the greater this cost of carry will be. For example, if
one were to hold corn in a silo for delivery in a few months, one
would have to pay for the storage facilities during that time
period. This cost of carry is implicit in the futures contract,
that is, it is added to the price of the futures contract,
resulting in the basis.
[0006] There are exchanges, such as the New York Mercantile
Exchange (NYMEX) and the Chicago Mercantile Exchange (CME), that
trade many futures contracts for which the underlying instrument is
a commodity, such as crude oil. For example, the NYMEX has two
standard types of futures contracts for light sweet crude oil,
known as the West Texas Intermediate (WTI) contract and the Brent
contract. Typically, these and other types of futures contracts
that are traded on exchanges based in the United States of America
use U.S. dollars as the currency upon which the contract is
based.
[0007] In recent years, foreign investors, speculators, and hedgers
have become a significant part of the market for futures contracts
listed on U.S. exchanges, and investors, speculators, and hedgers
in the U.S. have become a significant part of the market for
futures contracts listed on non-U.S. exchanges. For these market
participants, volatility in foreign exchange and currency markets
makes the value of the underlying investment instruments uncertain,
due to price fluctuations in the relative value of the U.S. dollar.
Therefore, there is a need to enable foreign market participants to
enter into futures contracts offered by exchanges based in the U.S.
while protecting those same market participants from being
subjected to foreign exchange rate fluctuations. Likewise, there is
a corresponding need to enable U.S. market participants to enter
into futures contracts offered by exchanges based outside the U.S.
while protecting those same market participants from being
subjected to foreign exchange rate fluctuations.
SUMMARY OF THE INVENTION
[0008] In one aspect, the invention provides a method for executing
a transaction relating to a first futures contract. The first
futures contract includes a first latest possible delivery date and
a first predetermined amount of a tradable asset, a first contract
price, and a first settlement price. Each of the first contract
price and the first settlement price is expressed as a respective
amount of a first currency, such as U.S. dollars. The first
settlement price is updated on a periodic basis, typically a daily
basis. The method comprises the steps of: providing a second
futures contract to a buyer, the second futures contract having an
underlying instrument that comprises the first futures contract,
wherein the second futures contract includes a second latest
possible delivery date, a second contract price, and a second
settlement price, each of the second contract price and the second
settlement price being expressed as a respective amount of a second
currency, typically a selected foreign currency, the second
settlement price being updated on a periodic basis, and the second
latest possible delivery date occurring on or before the first
latest possible delivery date; performing a periodic mark-to-market
operation whenever the second settlement price is updated by either
crediting or debiting a buyer account based on the corresponding
updated second settlement price; delivering the second futures
contract on or before the second latest possible delivery date by
providing the first futures contract to the buyer in exchange for a
payment from the buyer of a current second settlement price; and
delivering the first futures contract on or before the first latest
possible delivery date by delivering one or the other of the first
predetermined amount of the tradable asset to the buyer and a
current first settlement price.
[0009] The tradable asset may include a commodity, such as crude
oil, or a stock, a stock index, or a financial index. The first
futures contract may include a standard WTI contract or a standard
Brent contract. The second latest possible delivery date may occur
one day prior to the first latest possible delivery date. Each of
the first currency and the second currency may be selected from the
group consisting of U.S. dollars, European euros, Canadian dollars,
U.K. pounds sterling, Australian dollars, New Zealand dollars,
Swiss francs, Norwegian kroner, Swedish kronor, and Japanese
yen.
[0010] In another aspect, the invention provides a method of
facilitating a trade involving a first futures contract. The first
futures contract includes a first latest possible delivery date and
a first predetermined amount of a tradable asset, a first contract
price, and a first settlement price. Each of the first contract
price and the first settlement price is expressed as a respective
amount of a first currency, such as U.S. dollars. The first
settlement price is updated on a periodic basis, typically a daily
basis. The method comprises the steps of: providing a second
futures contract to a buyer, the second futures contract having an
underlying instrument that comprises the first futures contract,
wherein the second futures contract includes a second latest
possible delivery date, a second contract price, and a second
settlement price, each of the second contract price and the second
settlement price being expressed as a respective amount of a second
currency, typically a selected foreign currency, the second
settlement price being updated on a periodic basis, and the second
latest possible delivery date occurring on or before the first
latest possible delivery date; performing a periodic mark-to-market
operation whenever the second settlement price is updated by either
crediting or debiting a buyer account based on the corresponding
updated second settlement price; delivering the second futures
contract on or before the second latest possible delivery date by
providing the first futures contract to the buyer in exchange for a
payment from the buyer of a current second settlement price; and
delivering the first futures contract on or before the first latest
possible delivery date by delivering one or the other of the first
predetermined amount of the tradable asset to the buyer and a
current first settlement price.
[0011] The tradable asset may include a commodity, such as crude
oil, or a stock, a stock index, or a financial index. The first
futures contract may include a standard WTI contract or a standard
Brent contract. The second latest possible delivery date may occur
one day prior to the first latest possible delivery date. Each of
the first currency and the second currency may be selected from the
group consisting of U.S. dollars, European euros, Canadian dollars,
U.K. pounds sterling, Australian dollars, New Zealand dollars,
Swiss francs, Norwegian kroner, Swedish kronor, and Japanese
yen.
[0012] In yet another aspect, the invention provides a system for
executing a transaction relating to a first futures contract. The
first futures contract includes a first latest possible delivery
date and a first predetermined amount of a tradable asset, a first
contract price, and a first settlement price. Each of the first
contract price and the first settlement price is expressed as a
respective amount of a first currency, such as U.S. dollars. The
first settlement price is updated on a periodic basis, typically a
daily basis. The system comprises a server at which the first
futures contract is actively traded and an interface in
communication with the server, the interface being configured to
enable a buyer to enter into the first futures contract. The server
is configured to: provide a second futures contract to a buyer, the
second futures contract having an underlying instrument that
comprises the first futures contract, wherein the second futures
contract includes a second latest possible delivery date, a second
contract price, and a second settlement price, each of the second
contract price and the second settlement price being expressed as a
respective amount of a second currency, typically a selected
foreign currency, the second settlement price being updated on a
periodic basis, and the second latest possible delivery date
occurring on or before the first latest possible delivery date;
perform a periodic mark-to-market operation whenever the second
settlement price is updated by either crediting or debiting a buyer
account based on the corresponding updated second settlement price;
deliver the second futures contract on or before the second latest
possible delivery date by providing the first futures contract to
the buyer in exchange for a payment from the buyer of a current
second settlement price; and deliver the first futures contract on
or before the first latest possible delivery date by delivering one
or the other of the first predetermined amount of the tradable
asset to the buyer and a current first settlement price.
[0013] The tradable asset may include a commodity, such as crude
oil, or a stock, a stock index, or a financial index. The first
futures contract may include a standard WTI contract or a standard
Brent contract. The second latest possible delivery date may occur
one day prior to the first latest possible delivery date. Each of
the first currency and the second currency may be selected from the
group consisting of U.S. dollars, European euros, Canadian dollars,
U.K. pounds sterling, Australian dollars, New Zealand dollars,
Swiss francs, Norwegian kroner, Swedish kronor, and Japanese
yen.
BRIEF DESCRIPTION OF THE DRAWINGS
[0014] FIG. 1 illustrates a block diagram of a system for executing
a transaction relating to a futures contract according to a
preferred embodiment of the invention.
[0015] FIG. 2 is a flow chart that illustrates a method of
executing a transaction relating to a futures contract according to
a preferred embodiment of the invention.
DETAILED DESCRIPTION OF THE INVENTION
[0016] The present invention provides a system and a method for
enabling an investor, speculator, or hedger to enter into a futures
contract that uses a first currency, such as U.S. dollars, while
designating a preferred second (e.g., foreign) currency upon which
to base the futures contract. In this manner, the investor is
essentially able to substitute the desired second currency for the
first currency and thereby remove risk relating to relative
volatility of the first currency over the term of the futures
contract.
[0017] Referring to FIG. 1, a block diagram illustrates an
electronic trading system 100 according to a preferred embodiment
of the present invention. The system includes one or more servers
105, also referred to as a trading host 105, and one or more
interfaces 110. The trading host 105 is preferably implemented by
the use of one or more general purpose computers, such as, for
example, a Sun Microsystems F15k. Each interface 110 is also
preferably implemented by the use of one or more general purpose
computers, such as, for example, a typical personal computer
manufactured by Dell, Gateway, or Hewlett-Packard. Each of the
trading host 105 and the interface 110 can include a
microprocessor. The microprocessor can be any type of processor,
such as, for example, any type of general purpose microprocessor or
microcontroller, a digital signal processing (DSP) processor, an
application-specific integrated circuit (ASIC), a programmable
read-only memory (PROM), or any combination thereof. The trading
host may use its microprocessor to read a computer-readable medium
containing software that includes instructions for carrying out one
or more of the functions of the trading host 105, as further
described below.
[0018] Each of the trading host 105 and the interface 110 can also
include computer memory, such as, for example, random-access memory
(RAM). However, the computer memory of each of the trading host 105
and the interface 110 can be any type of computer memory or any
other type of electronic storage medium that is located either
internally or externally to the trading host 105 or the interface
110, such as, for example, read-only memory (ROM), compact disc
read-only memory (CDROM), electro-optical memory, magneto-optical
memory, an erasable programmable read-only memory (EPROM), an
electrically-erasable programmable read-only memory (EEPROM), or
the like. According to exemplary embodiments, the respective RAM
can contain, for example, the operating program for either the
trading host 105 or the interface 110. As will be appreciated based
on the following description, the RAM can, for example, be
programmed using conventional techniques known to those having
ordinary skill in the art of computer programming. The actual
source code or object code for carrying out the steps of, for
example, a computer program can be stored in the RAM. Each of the
trading host 105 and the interface 110 can also include a database.
The database can be any type of computer database for storing,
maintaining, and allowing access to electronic information stored
therein. The host server 105 preferably resides on a network, such
as a local area network (LAN), a wide area network (WAN), or the
Internet. The interface 110 preferably is connected to the network
on which the host server resides, thus enabling electronic
communications between the trading host 105 and the interface 110
over a communications connection, whether locally or remotely, such
as, for example, an Ethernet connection, an RS-232 connection, or
the like.
[0019] Referring to FIG. 2, a flow chart 200 illustrates a process
that is executed by the system 100 for facilitating trading of
futures contracts in foreign currencies, according to a preferred
embodiment of the present invention. In the first step 205, a first
futures contract involving a tradable asset, such as a stock or a
commodity, is offered at a market price that is expressed in a
first currency, typically U.S. dollars. The first futures contract
also includes a first settlement price which is also denominated in
the first currency and is updated on a periodic basis, typically on
a daily basis. Usually, the first settlement price is roughly
equivalent to a prevailing market price for the tradable asset at
the end of each trading day. In the next step 210, a second futures
contract is provided that includes the first futures contract as
the underlying instrument. Notably, the second futures contract may
include an integral number (e.g., 2, 3, 10, etc.) of the first
futures contract as the underlying instrument; however, in a
preferred embodiment, the integral number is equal to one.
[0020] The second futures contract is denominated in a preferred
second currency, typically a foreign currency, such as, for
example, European euros, Canadian dollars, U.K. pounds sterling,
Australian dollars, New Zealand dollars, Swiss francs, Norwegian
kroner, Swedish kronor, South African rand, Hong Kong dollars,
Singapore dollars, Brazilian real, Russian rubles, Chinese
renminbi, Korean won, Indian rupees, or Japanese yen. Preferably, a
market participant that is interested in entering the futures
contract may choose any foreign currency that is preferred by that
investor. Alternatively, an approved list of specific foreign
currencies may be provided by the exchange, and the investor may
choose a preferred foreign currency from the approved list. The
contract price for the second futures contract is expressed as an
amount of the second currency that typically has a value that is
substantially equivalent to the value of the market price as
expressed in the first currency.
[0021] Although each of the first and second futures contracts
typically includes a last trading date, there is also a latest
possible delivery date for each contract, which may or may not
coincide with its last trading date. Typically, there is a delivery
period which may begin several days in advance of the last trading
date, and which may end up to several days after the last trading
date. In a preferred embodiment of the invention, the latest
possible delivery date of the second contract is set to occur on or
before the latest possible delivery date of the original futures
contract. In a more preferred embodiment of the invention, the
latest possible delivery date of the second futures contract occurs
one day prior to the latest possible delivery date of the first
futures contract. An investor preferring to deal in the second
currency agrees to enter the second futures contract.
[0022] In step 215, a mark-to-market operation is performed. At
regular intervals, typically once per day, the issuer of each
futures contract (i.e., typically, an exchange) determines a
settlement price for each futures contract. Each settlement price
is typically based on an average price of the last trades of that
period. A variation margin is computed based on either the original
contract price, if the contract was purchased within the last
regular interval for determining the settlement price, or the
previously determined settlement price, if the contract had been
purchased prior to the most recent update of the settlement price.
The variation margin is equal to the difference between the current
settlement price and either the contract price or the previous
settlement price. The mark-to-market operation entails either
crediting the buyer in the amount of a positive variation margin,
or debiting the buyer in the amount of a negative variation
margin.
[0023] Step 220 occurs on or before the latest possible delivery
date of the second futures contract. In this step, the exchange
executes the delivery of the second futures contract by delivering
the first futures contract in exchange for a payment from the buyer
to the seller in the amount of the current settlement price, as
expressed in the second currency. Typically, even though the first
futures contract has a contract price that is expressed in terms of
the first currency, the effective contract price of the first
futures contract is zero, as expressed in the first currency, in
view of the payment of the settlement price in the second currency.
In an alternative embodiment, the buyer may be required to pay an
additional amount as expressed in the first currency.
[0024] Finally, step 225 occurs on or before the latest possible
delivery date of the original futures contract. In this final step
of the method, the exchange executes the delivery of the original
futures contract by delivering either the physical commodity itself
or an amount of the first currency that is equivalent to the
current settlement price as expressed in the first currency. Thus,
the investor has now received either the physical delivery of the
desired commodity in exchange for the settlement price as expressed
in the preferred foreign currency, or the equivalent market value
of that commodity. Because the investor never prices the futures
contract in terms of the first currency, nor transacts in the first
currency (with the possible exception of any transactions that may
occur during the short interval after delivery of the second
contract and prior to delivery of the first contract, transactions
which will generally net out over the interval), the investor is
completely isolated from any volatility associated with the first
currency in relation the first futures contract.
[0025] Of course, as is often the case with futures contracts, the
investor may decide to roll a current futures contract over to a
new futures contract having a later last trading date, or a later
latest possible delivery date, or both. This is accomplished by
liquidating the current futures contract and simultaneously
entering into a new futures contract having a later delivery month.
As with any futures contract, this type of transaction may occur at
any point in time prior to the last day of trading of the current
futures contract (i.e., referring again to FIG. 2, after step 210
and prior to step 220). In this event, steps 220 and 225 are simply
deferred until the respective last trading dates or latest possible
delivery dates of the corresponding new replacement futures
contracts.
[0026] The present invention provides an arbitrageur with a
capability of no-risk arbitrage between the second futures
contract, which is denominated in the preferred second currency,
and the first futures contract, which is denominated in the first
currency. The existence of an arbitrage condition allows the
arbitrageur to use a precise mathematical relationship to price the
second futures contract based on the first futures contract, thus
leveraging the liquidity and market share of the tradable asset.
For example, an arbitrageur could price a WTI futures contract in
euros solely based on the current exchange rate between the U.S.
dollar and the euro and the price of the U.S. WTI contract, thus
ensuring that a liquid and ready market can be made immediately
following the launch of the new euro-based WTI contract.
[0027] Moreover, the existence of an arbitrage condition allows an
investor in the second futures contract an alternative mechanism
for precisely and completely hedging his risk, regardless of
whether the market in the second futures contract is sufficiently
liquid at the time. For example, if the purchaser of a euro-based
WTI contract desires to sell his contract after normal trading
hours in Europe, but is unable to find a ready market for the
desired sale, he may then turn to the U.S. market, where the
corresponding dollar-denominated futures contract is being actively
traded at that time. By selling a dollar-denominated futures
contract and executing a foreign currency exchange transaction, the
investor can close his position with zero additional risk, because
his euro-based WTI contract will be converted to a
dollar-denominated contract upon delivery, thereby offsetting his
short position in the dollar-denominated contract.
[0028] Crude oil is perhaps the most widely traded commodity on
world commodity exchanges. One popular type of futures contract for
light sweet crude oil is known as the WTI contract, which is traded
on the NYMEX exchange. A second popular type of futures contract
for light sweet crude oil is known as the Brent contract, which is
also traded on the NYMEX exchange. Appendix A, which is
incorporated by reference herein in its entirety, provides a
description of some of the specific aspects of certain futures
contracts involving light sweet crude oil as offered on the NYMEX
exchange.
[0029] The following example is provided to illustrate a method
according to a preferred embodiment of the present invention: It is
supposed that a German investor is interested in purchasing a WTI
contract on the NYMEX exchange. In particular, on Mar. 17, 2008,
the German investor desires to purchase a monthly futures contract
for May 2008, which provides for delivery of 1000 barrels of oil.
The prevailing market price of WTI oil on Mar. 17, 2008 is
$105/barrel. Therefore, the notional value of the commodity
underlying the desired contract is $105,000. However, the German
investor is leery of recent fluctuations in the U.S. dollar, and
therefore would prefer to enter the futures contract in euros. As
of Mar. 17, 2008, the prevailing exchange rate between U.S. dollars
and euros is $1.50/euro. Therefore, the German investor agrees to
enter a euro-denominated WTI futures contract for a price of
105,000/1.50=70,000 euros, with a last trading date of Apr. 21,
2008, i.e., one day prior to the Apr. 22, 2008 last trading date of
the standard monthly WTI contract. It is noted that for purposes of
this example, the last trading date is assumed to be equivalent to
the latest possible delivery date for the second futures
contract.
[0030] As the time passes over April of 2008, it is assumed for
purposes of this example that the price of oil rises from
$105/barrel to $115/barrel. In addition, over that same interval,
it is assumed for purposes of this example that the value of the
U.S. dollar decreases relative to the euro, from $1.50/euro to
$1.52/euro. So, at the end of each trading day, a settlement price
is computed by the exchange in both U.S. dollars and euros, and the
German investor's account is either credited or debited, in euros,
based on that day's settlement price as compared with the previous
day's settlement price. Finally, on Apr. 21, 2008, the German
investor's contract is worth 1000*$115=$115,000/$1.52=75,657.89
euros, which represents an increase in value of 5,657.89 euros
since he entered the euro-denominated futures contract. Therefore,
as of that date, the German investor's account has been credited by
a net of 5,657,89 euros, and he is now required to pay 75,657.89
euros in exchange for a WTI contract for 1000 barrels of oil that
will expire on Apr. 22, 2008. Then, upon delivery of the original
futures contract (which, for a standard US-dollar denominated WTI
contract, typically occurs a few days after its last trading date),
the investor receives a physical delivery of the 1000 barrels of
oil. In this manner, by correctly guessing that the value of oil
would rise over the interval of the futures contract, the investor
has received the desired oil at the lower price that was prevailing
at an earlier time, similar as any conventional futures contract.
In addition, the investor has effectively protected himself from
fluctuations in the value of the U.S. dollar by executing the
transaction in euros, according to a preferred embodiment of the
present invention.
[0031] The exchange may choose to provide margin offsets to
investors holding offsetting positions in the first and second
futures contracts. For example, the exchange may choose to provide
a credit to an investor who has bought the second futures contract
and sold the first futures contract, thereby creating a position
that bears no pricing risk in relation to the first tradable asset.
The provision of such a credit would reduce the costs for
arbitrageurs to trade the second futures contract and would thus
promote liquidity and trading volume in the market for the second
contract.
[0032] Furthermore, the exchange may choose to provide additional
margin offsets to investors holding offsetting positions in the
first and second futures contracts, and in the first and second
currencies. For example, the exchange may choose to provide a
credit to an investor who has bought the second futures contract
and sold the first futures contract while buying the second
currency and selling the first currency, thereby creating a
position that bears no pricing risk in relation to the first
tradable asset or the second currency. The provision of such a
credit would reduce the costs for arbitrageurs to trade the second
contract and would thus promote liquidity and trading volume in the
market for the second futures contract.
[0033] In an alternative embodiment of the invention, either or
both of the first and second futures contracts may include a
contract price that is denominated in a selected commodity, such as
gold or silver, instead of a currency. In this manner, the selected
commodity may be used as a replacement for a currency.
[0034] In another alternative embodiment of the invention, the
first and second futures contracts may utilize the same currency.
In this embodiment, because the first futures contract acts as the
underlying instrument for the second futures contract, a future on
a futures contract is manifested. This alternative embodiment may
be used advantageously, for example, when a bundle of first futures
contracts is used as the underlying instrument for the second
futures contract. For example, a "summer strip" of crude oil
futures contracts may serve as a bundle of first futures contracts,
e.g., a Summer 2008 contract may comprise a future on the bundle of
April, May, June, July, August, September, and October crude
futures. Such a bundle may be of interest to a trader, since he
pays commissions on only one contract instead of seven when he buys
this.
[0035] In another alternative embodiment of the invention, one or
both of the first and second futures contracts may be offered
and/or traded in an open-outcry trading environment. In yet another
alternative embodiment of the invention, either or both of the
first and second futures contracts may be offered and/or traded
based on a telephone system for communicating offers and bids for
each respective futures contract.
[0036] In another alternative embodiment of the invention, the
mark-to-market operation may occur at irregular intervals or be
omitted completely. For example, if the mark-to-market operation
were omitted, the second contract would be delivered by providing
the first futures contract to the buyer in exchange for a payment
from the buyer of the original second contract price.
[0037] While the present invention has been described with respect
to what is presently considered to be the preferred embodiment, it
is to be understood that the invention is not limited to the
disclosed embodiments. To the contrary, the invention is intended
to cover various modifications and equivalent arrangements included
within the spirit and scope of the appended claims. For example,
instead of crude oil, any commodity that is commonly traded on
commodities markets may be the subject of a futures contract
according to an embodiment of the present invention. In addition,
instead of a physical commodity, any tradable asset that is
commonly the underlying asset of a futures contract traded on an
exchange may be used according to an embodiment of the present
invention. Further, instead of U.S. dollars and euros, any foreign
currency that is preferred by market participants and accepted by
the exchange clearing house may be used according to an embodiment
of the present invention, and any futures contract that is
ordinarily based on a first currency other than U.S. dollars may
also be used according to an embodiment of the present invention.
For example, a London commodities exchange may offer futures
contracts based on the British pound sterling, and the investor's
preferred foreign currency may be the U.S. dollar. The scope of the
following claims is to be accorded the broadest interpretation so
as to encompass all such modifications and equivalent structures
and functions.
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